August 2016 Update

Welcome to our new subscribers and to our second monthly update! In these updates we plan to summarize some of the LMS news over the past month from e-Literate and other sources, take a deeper look at select topics based on our market data, and highlight specific issues that emerge from our discussions.

Select LMS News and Analysis

All the major LMS providers (at least in terms of the US and Canadian higher ed market) held their users conferences between May and July this year. We were able to attend all but one of these, and for the one we did not attend (D2L) the company provided in-depth demos with technical staff available to answer questions. We have written a series of blog posts on e-Literate summarizing our notes on the conferences, and we plan a separate subscriber-only webinar in September to discuss our observations and analysis in more depth.

  • Sakai – Michael gave a keynote and attended the Apereo Conference, and we already shared extensive notes in the July monthly update for Sakai. In his e-Literate blog post “Sakai Is Probably Healthier Than You Think”, Michael noted that while many US Sakai schools have migrated to Canvas in the past few years, Sakai’s open source contributions – which provide one good indicator of open source project health – have actually accelerated lately. Sakai usage and institutional investment has increased outside of the US, particularly in Spain.
  • Moodle – At the US Moodle Moot in Los Angeles, Phil attended and described in a blog post “MoodleMoot US 16: Playing small-ball” how the Moodle product direction shows a consistent mission and “just expanding and improving” philosophy. There will be an interesting release of 3.2 in November that will include a new “blockless theme” aimed at improving the out-of-the-box user experience. We believe that institutional acceptance (or lack thereof) of this release and new theme will be a strong marker on future Moodle market share in the US and Canada.
  • Schoology – This company has been increasing their focus on the US higher education market for at least a year and a half, with their January 2015 win with Colorado State University Global Campus providing a significant milestone in their progress. We at e-Literate have been covering the company in more depth, including Phil’s post “Schoology: The strongest LMS you’ve never seen” based on recent exploration analysis of the company and product line. Put directly, Schoology has a very strong LMS product and reputation in adjacent markets (K-12 and international), which highlights the lack of significant market share progress in US and Canadian higher education somewhat perplexing. We believe this company has a lot of potential, but they are not over the hump yet.
  • Blackboard – Despite the company’s inability to sell itself last year and the challenges in releasing Learn Ultra – the often delayed redesign of the flagship LMS – Blackboard still has the largest market share in higher education. The new executive team, led by CEO Bill Ballhaus, is leading Blackboard in a more focused direction, based on observations before and during their users conference. Phil covered the event in two posts – “About The Blackboard Partnership With IBM And Amazon Web Services” and “Blackboard Learn Ultra: Ready or not?”. Since the conference there have been additional leadership changes at the company, with long-time executive Matt Small leaving his post as President of International to become CEO at another edtech firm. Now that Learn Ultra is available for pilots, we’ll be watching carefully for reactions from institutions running these pilots.
  • Brightspace by D2L – D2L’s users conference was the one that neither Phil nor Michael attended, leading to our post “Changes at D2L: A second-hand view from users conference”. Thanks to the in-depth demos provided by the company, we have seen some big product changes and look forward to customer reaction to the Daylight Experience, D2L’s new design approach intended to upgrade the user experience of the core LMS and other product lines. While D2L has long been known to have an impressive client retention rate but with recent lack of major wins – read that as stable customer base in higher ed over the past few years – we are seeing some changes this year. D2L has some big wins, some in higher ed but more in K-12, but they also have some major client defections. We’ll watch this fall and beyond for customer reaction to product line changes as well as whether we are seeing the beginnings of more significant market share changes.
  • Canvas by Instructure – While Michael and Phil both attended InstructureCon this year, it was the first time for Michael. In his post “Instructurecon 2016: Why This Company is Still Formidable (and Misunderstood)”, he explored two of the claims that competitors or critics of the company level – that they “open wash” or are “fauxpen”; and that they have no vision. While Instructure seems to keep on keeping on, they have recently made some major changes in their organization to improve the product vision and ability to deliver. In particular, we’ll watch how well Instructure delivers on Mastery Paths, their approach to selective or conditional releases which will attempt to make this capability that has been available in other products for a long time more usable for mainstream faculty. 
Spotlight: Notes From First Analysis Conference Call

On August 11th Michael and Phil were the guests on a conference call hosted by Corey Greendale of First Analysis, a venture capital and financial analysis firm. We discussed ed tech in general but focused on the LMS market and digital transformation of academic publishing. Below we are sharing Corey’s notes from the call that First Analysis put out in a research note. We have excluded any financial recommendations or analysis made by First Analysis based on the conversation and just included the summary our our comments.

Current state of the LMS market. Hill reflected on the current state of the institutional education LMS market, which we divide into three segments, domestic higher education, domestic K-12, and international. He noted that as the most developed segment of the market, higher ed has long been nearly fully penetrated, estimating over 90% of institutions have employed an LMS since the early 2000s. Hill believes, however, that it has only been over the past three to five years that faculty usage of LMSs has moved toward saturation, estimating that today over 80% of higher ed courses leverage an LMS, leading to routine use among faculty and students. Relative to higher ed, the K-12 and international segments are at an earlier stage of LMS penetration, with lower adoption and usage within institutions. Hill noted that a greater number of “freemium” LMS solutions serve the K-12 segment relative to higher ed. These freemium solutions offer basic functionality free of charge but keep more advanced features behind a paywall.

Hill observed that in general, LMS providers tend to earn fewer dollars per student in K-12 and must employ a sales model tailored to the segment that is generally dissimilar to what is needed for higher ed, which can be challenging for smaller providers.

Tying in a recently published e-Literate article using data from LISTedTECH, Hill noted that Instructure’s Canvas LMS has seen its share of total higher ed LMS implementations grow to a current level above 80% in the U.S. and Canada, driven by its capabilities as a native cloud-based system and user-friendly approach and features. Hill also believes the higher ed market tends to reward a relatively small number of LMS providers.

Hill pointed out that the higher ed LMS market has tended to evolve relatively slowly in terms of new entrants gaining substantial share, with past potentially disruptive entrants having a muted market effect. Hill, however, sees the potential for greater growth in the K- 12 and international segments for LMS providers both large and small, given the earlier stage of these markets.

LMS market replacement cycle, pricing, and faculty role in the decision process. Hill sees the typical time period an institution will remain with an LMS as three to five years. He noted some institutions will wait a decade or longer before targeting a replacement, depending on contract length. More recently, Hill has seen a higher volume of voluntary migration relative to prior years, perhaps signaling a secular change in the replacement cycle, with a strong link between Instructure’s recent momentum and high rates of replacement-driven growth. This, in Hill’s view, has been driven by increasing awareness among institutional faculty that optimal LMS selection can lead to productivity and other professional improvements, with faculty adopting an increasingly active role in pushing for a change of LMS and contributing input on product selection. In addition, Hill noted that institutions are increasingly experienced and comfortable in handling the LMS migration process, eroding a historical barrier to LMS replacement.

Turning to LMS pricing, Hill believes the dynamic between pricing and purchasing decisions has evolved, with pricing less important today relative to five years ago. Before the current phase of the LMS market began with the introduction of cloud-based solutions, the market was somewhat stagnant for several years, leading to commoditization and purchasing decisions made based largely on price. More recently, with a relative abundance of differentiated, feature-rich LMS products, pricing has become less important in purchasing decisions.

Future of the LMS market. In the long run, Hill expects an increasing level of integration in the LMS space enabling a broader array of learning applications, with the LMS functioning as a central hub that links applications and collects data. In our view, Instructure’s strategy, built around expanding from its LMS offerings into the broader HCM space, fits well with this “LMS as hub” dynamic.

Competition and market share within the publishing industry. Reflecting on the competitive position of leading publishers, Feldstein said that he believes Pearson’s large size will allow it to take risks while competing in a broad range of product categories. At the same time, he sees McGraw-Hill as an industry leader in its digital strategy, enabled by highly effective cultural change management that has allowed the company to produce superior digital content that leverages the advantages of the format. Feldstein also noted publishers are increasingly embracing the direct-to-student textbook rental model, though he believes students prefer a centralized, Netflix-like model in renting textbooks rather than renting directly from publishers, given the convenience of a single source. Feldstein also observed that publishers target revenue through sales of textbook content related to graded homework, which is likely to compel students to make purchases.

Digital adoption trends among publishers. As noted, Feldstein sees McGraw-Hill as a leader in digital content, estimating that approximately half of the company’s sales are now digital. Feldstein sees Pearson as a leader in the space given its highly effective, high-touch sales model involving salespeople working closely with higher ed faculty to evaluate academic material, which mitigates a key barrier to closing sales. Feldstein sees the increasing abundance of digital content as both an opportunity and barrier for large publishers, providing an opportunity for meaningful differentiation that requires significant capital investment.

Feldstein said that as a whole, digital adoption among publishers has progressed more slowly than might have been expected, as publishers explored the most effective uses of digital content in easing faculty challenges. Institutional procurement processes are an additional barrier to greater digital adoption in Feldstein’s view, with digital product evaluation often complex relative to print, and subject to delays driven by decision-makers who are inexperienced in selecting digital content. Finally, Feldstein observed that an additional source of friction seen in digital content adoption has come in the form of faculty hesitance about the format, which he believes relates to sensitivity that digital products may alter teaching methodologies.

Coming Up . . .

As mentioned above, the September monthly update will feature a live webinar for subscribers where we share our observations in more depth and answer participant questions.

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